An Open Letter to My Friends, the Financiers of America

Christopher Anderson/Magnum Photos
Outside the Bankers Trust Company Building after the collapse of Lehman Brothers, 2008

It is neither as an enemy of free-market capitalism, nor as a French devotee of Colbertism, much less as an anti-American European that I take the liberty to address you. Rather, I write to you as a militant supporter of the euro, driven by both passion and reason, and annoyed at having been obliged to read over the years such a mass of prophecies, including in The New York Review, concerning the imminent death of the euro; some of those predictions, for whatever motives, whether ill or well intentioned, aspire to become self-fulfilling prophecies.

Behind a number of these views, it is possible to glimpse a deeply held belief and a gut feeling that no political construct—and the euro is a political construct, make no mistake—can govern markets. You trumpeted this critique of the euro from the day that the Maastricht Treaty was signed until the day the single currency was implemented. Once the euro went into circulation, you fell silent for as long as the euro seemed to be strengthening against the dollar, with a favorable exchange rate ranging from $1.30 to $1.40, but you piped up again once it displayed signs of weakness (let’s not forget that it dropped from its initial rate of $1.17 to a low of $0.95) and now the sovereign debt crisis seems to have swept some of you giddily to the brink of what the Germans call Schadenfreude—literally, a malicious joy in the sorrow of others.

Many of you fall outside this category: you do not qualify as radical market zealots, you claim to be strongly in favor of the European conception, you say that you support the euro, but you cling to a statement of principle: no currency can survive if it is not based on political power. Unless the Europeans race, at top speed, through every step that leads to a single federal state, the euro is doomed. Since the more astute among you are well aware that you are preaching the impossible, you view the single currency as a dead letter.

There are also a number of economists in your ranks who see a single currency as a blatant negation of the underlying principles of any market economy. Obsessed as you are by competitive inequalities, you believe that the less competitive countries, unable to devalue their own currency, would be forced to resort to an internal deflation whose scope would trigger uncontrollable social unrest. This syllogism is particularly dear to the heart of my friend Nouriel Roubini: the outlying countries of the European Union are being forced to conduct internal devaluations, and especially salary cuts, that would lead to open revolution; the governments therefore will opt for an exit from the euro rather than face revolution.

Last of all, many of you think that the euro could survive if the European Central Bank (ECB) operated more or less like the Bank of England and simply printed money without restraint: an odd belief that flies in the face of decades of orthodoxy, which held that using a central bank to finance a country’s debt was, in the eyes of the very same experts, tantamount to economic treason.

Far be it from me to suggest that these analyses are all debatable or outright wrong. By the same token, far be it from me to insist that the situation in Europe is somehow irenic and peaceable. And last of all, far be it from me to subscribe to the illusory belief, far too commonly held in Europe, that there is a conspiracy of some kind among the Anglo-Saxon economies to the detriment of Europe. But I do believe, on the other hand, that your thoughts about the euro have more than a few holes in them.

Your attention is riveted by the complexity of the European political system, which you condemn as ineffectual, powerless, and sluggish in its dealings with fast-moving markets, as well as blithely unaware of the challenges that face it. A modicum of humility on your part, however, might well be in order in this area. May I remind you that twenty-seven national European parliaments approved a first debt relief package for Greece, whereas in the fall of 2008 the first step your House of Representatives took was to reject the TARP rescue plan, thus aggravating the post-Lehman crisis? Might I venture a comparison between, on the one hand, the bickering and recriminations in the US Congress during the summer of 2011 over the American debt ceiling that pushed the world’s greatest economic power to the brink of default and, on the other hand, the parliamentary votes with which the seventeen eurozone member states approved between late July and mid-October 2011 the second Greek bailout package, which, it’s worth pointing out, featured very large provisions for debt forgiveness?

The European decision-making process may well be tortuous, clumsy, and hardly transparent to the broader public, but it works. Who could have imagined, just two years ago, the establishment of stability funds, followed by an agreement on a permanent financial stability mechanism? These tools, however, are technically adequate to the scale of the Spanish problem. They are not up to the scale of the Italian problem. But the risk of default by Italy, the world’s third-largest debtor nation, is not just a European problem. It’s a global problem: neither the United States, China, nor Japan can afford to run such a risk. So it hardly seems justified to criticize the Europeans, and only the Europeans, for failing to find a way of straightening out a crisis situation that actually concerns the worldwide financial community.

Who could ever have foreseen that, imbued with the culture of the Bundesbank, the European Central Bank would purchase sovereign debt and undertake a policy of quantitative easing in the form of large-scale loans, greater in relation to GDP than the campaign of easing undertaken by the Fed? Who would have believed that Mario Draghi, the president of the ECB, with the support of German Chancellor Angela Merkel would deploy a “nuclear deterrent” with respect to the markets, pledging to intervene as often and as much as needed, that is to say, without limits, in order to preserve the euro? Do you think that it was healthy, in those circumstances, to sound the alarm and to explain that without a “firewall” of, according to one of you, E1 trillion, according to another, E2 trillion, or according to a third, E3 trillion, the eurozone is doomed? Do these suggestions strike you as sensible? Moreover, I prefer to ignore this kind of statement when made by market operators who are shorting the euro.

Every time a public opinion poll highlights the disillusionment of this or that sector of the European populace, especially in Germany, we are treated to articles under your bylines proclaiming that, caught between lack of market confidence and popular disapproval, the euro is doomed. In so doing, you show a failure to understand that, even though public opinion may differ, the governing establishment has made its choice. Do you seriously believe that the Germans are unaware of the degree to which they, and particularly their exports, benefited from the euro? They need only turn their attention to the unstoppable rise of the Swiss franc to get a clear picture of how badly a “euromark” would damage their export markets.

The damage, of course, would not be limited to their fellow European countries, crippled by a full-blown recession in the case of a collapse of the euro, but would extend to emerging markets unwilling to buy goods at prices inflated by a rising euromark. Do you think the Germans are so naive that they fail to realize that the current financial crisis has been tremendously helpful to them and the scale of their products by exerting downward pressure on exchange rates? Even the nationalist tabloid Bild has been forced to acknowledge this point.

This week’s Finnish government or its equivalent elsewhere can certainly win domestic political points by attacking the euro; these are minor vicissitudes to which you attribute excessive importance, because you fail to fully appreciate the ins and outs of European politics. Accustomed to the backroom dealings of Washington, you instinctively discount the “stop and go” progress of American economic policy. Untutored in the complexities of European politics, you expect from the European Union a mechanical simplicity of operation that is by definition impossible to attain in any democratic system, much less the kind of highly sophisticated and idiosyncratic construction we have in Europe.

Likewise, you fail to grasp, whether willfully or unintentionally I couldn’t say, a very straightforward fact: there is not one European political leader—let me repeat, not one—who would be willing to take the blame in the eyes of posterity for signing the death warrant of the euro. The memory of the wars that ravaged European society is still too strong for anyone to be willing to undo the process that led to European unity. No one in Europe doubts for a minute that the collapse of the euro would automatically lead to the collapse of the European Union. Even the most reckless European statesmen tread cautiously on this terrain once they gain power.

The weight of history is not the only factor at play here. Everyone knows instinctively that the dismantling of the euro would entail a financial catastrophe that would make the fall of Lehman Brothers look like a Sunday school picnic in comparison. The idea of this country or that, whether its economy is weak or strong, returning to its old national currency is technically inconceivable. The countdown to such a decision is completely impracticable; if the decision were made in the midst of fast-moving events on a weekend in the midst of a meltdown, it would create a mayhem of banking and economic disarray far greater than the crash of 1929.

If an economically strong country leaves the system, its currency will skyrocket until it throttles the underlying economy. If it’s a weak country, its currency will depreciate, triggering a devastating recession. And that’s saying nothing about the chaos of the banking system, the challenge of creating a fiduciary currency, the impossibility of rewriting all the contracts on the spot, the obligation to impose a drastic oversight on rates of exchange, the delays in paying businessmen, the instability of commercial networks, and the sheer impossibility of forcing the markets to work smoothly. To think, as some of you write, that such a transition can be coolly prepared in advance verges on childish naiveté. The secret couldn’t be kept long and the markets would be thrown into panicked frenzy.

There is an ironbound political law that governs our democracies: administrations abhor a vacuum and shun leaps into the unknown. Now, thermonuclear warfare aside, there is no greater or more dangerous unknown for a European country than an exit from the euro. Why are Europeans so deeply afraid to see little Greece—amounting to just 2 percent of the eurozone’s GDP—which basically burgled its way into the European Union, go back to the drachma? If the country in question were, say, Spain, on the weaker end of the scale, or Germany, on the more powerful end, the fear and anxiety would be overwhelming. Hence the certainty that, willingly or unwillingly, European leaders would agree to decisions that they can’t even imagine today, so deeply would those decisions run counter to their ordinary everyday convictions, in order to prevent such an outcome. Among those decisions would be the extension if necessary of loans by European institutions on an unprecedented scale. Who would have thought some months ago that Mario Draghi would announce the agreement of the ECB to buy government bonds on the secondary market without limit? As he can’t fail, he would go farther if necessary.

Musée d’Orsay, Paris/RMN/Art Resource
Edgar Degas: Portraits at the Stock Exchange, 1878–1879

But, you retort, all these historic and political considerations mean little in the face of market forces that have their own vote on how to read economic reality.

Let us not forget, however, that this is tantamount to treating as gospel truth the decisions of markets that for ten long years chose to believe that Greece was every bit as stable as Germany, and that Portugal’s state of economic health rivaled that of the Netherlands, and so financed both groups of countries at roughly the same rates. I doubt I heard, during all those years, any of you rise up indignantly inveighing against that folly and prophesying a dire reckoning when the markets hit the brick wall of reality.

Let us be done with backward-looking reproaches: What are we to say of your argument that the euro is incapable of surviving the huge internal disparities of competitive inequality between countries? Competitiveness these days is the stock phrase in any discussion of the eurozone. But it tends to overlook the fact that the challenges facing outlying countries cannot all be measured by this one yardstick. Let’s take the case of Greece. How many articles have been published stating that what Greece needs is a currency devaluation in order to make it competitive with its European partners again? As if to say that, once the currency was devalued, Greek industry would be fully capable of competing with its German rival! What’s troubling Greece is not a lack of competitiveness; rather it is the fact that it has an absentee government, and therefore taxes are simply left uncollected. If Greek taxpayers—and I would include among them the church and shipbuilders, both currently exempted from taxation by the Greek Constitution (!)—came face-to-face with a French- or English-style tax authority, the national budget would immediately run a primary surplus.

The tragic twist is that, for reasons of Greek national pride, we cannot demand that Greece be placed under a provisional European administration that would subject it to the rules of a modern economy both in the fiscal realm and with respect to competition and government functions. As for Italy, how can we talk about shortfalls in competitiveness when the country has a trade surplus? The handicap hobbling Italy is its inheritance of historical debt. Otherwise, its national budget is actually running a surplus and unemployment remains relatively low.

The country needs growth so that, holding its costs steady, it can begin to reduce the drag of its debt on the economy. In order to do so, it needs structural reforms, such as more procompetition regulations, reduction of labor costs, mutual sharing of burdens, and greater flexibility in the labor markets, all of which are reforms that Prime Minister Mario Monti is trying to bring about. Nor is it a question of competitiveness that has bogged down Spain in its current morass, but rather the painful process of extracting itself from a real estate bubble that had driven a purely fictional wave of growth.

The IMF is capable of gauging the specific challenges facing all these countries and does not settle for a one-size-fits-all explanation. The one country, however, where the focus on competitiveness is completely justified is France. The scope of the trade deficit offers clear proof of that fact. But as focused on the competitiveness of southern European countries as the markets may be, for now they have completely overlooked France—which, as a Frenchman, only fills me with joy!

I wouldn’t even think of encouraging you to bet against British debt. But do you find it reassuring that the rating agencies give the United Kingdom a triple-A rating, and that you yourselves, when you buy bonds issued by the UK Exchequer, validate this judgment, treating them practically on par with German Bunds? Yet the UK has a budget deficit bigger than Spain’s, a rate of economic growth every bit as anemic as in the eurozone, excessive household indebtedness, and middling levels of competitiveness.

So what is the reason for this British yield? It springs from the belief that a central bank, free to do as it sees best, will print as much money as is needed. It is not, therefore, the economic statistics of the United Kingdom that justify the confidence of the markets, but their faith in the ability of the Bank of England to create money. That is to say, the complete opposite of everything the very same markets believed for decades. It wasn’t all that long ago that the markets punished any country that simply printed money to finance itself. Is it verging on insolence to suggest that you apply different standards for different monetary zones?

The same thing that is true of England is true of your own country. I have no interest, as a European, in seeing you undermine the dollar and US Treasury bills: we would be the first to be hurt by it. You know perfectly well that in global indebtedness—whether of states, businesses, or individuals—the dollar zone is more than twice as indebted as the eurozone. But the factors that, just a few years ago, seemed like the natural cause of the weakness of your currency have by now vanished from the radar screens. To hear you tell it, there is no longer any relation between the strength of a currency, the overall level of indebtedness, and interest rates.

Far be it from me to suggest that we create a hierarchy of causes. Practically all causes can be said to be true and false at the same time, because economics is simply not an exact science. But the sheer brutality with which you swerve from one to the other, at the risk of forgetting that you once worshiped the idols you are now burning, should at least lead you to entertain some modicum of doubt about your methodologies. Convinced as I am of the permanence of the euro, I believe that one day you’ll swing back in favor of it with just as much certainty as you are now devoting to the idea that it is doomed to disappear.

The chief reason for your change of heart will have nothing to do with economics, or the testing of one theory against another. It will have more to do with the fact that you have suddenly understood that the Europeans cannot, will not, and would not even know how to throw their collective structure into reverse, that is, how to dismantle their single currency.

—Translated from the French by Antony Shugaar